Taxpayers anxiously awaiting news as to whether certain tax relief provisions that expired at the end of 2014 will be extended may soon have even more reason to celebrate the holidays. On December 17, 2015, the House of Representatives voted 318-109 to pass a $629 billion tax extenders package that would extend or make permanent a group of approximately 50 business and individual incentives. The Protecting Americans from Tax Hikes Act of 2015 (the Act), as the bill is titled, would prevent an immediate tax increase on millions of Americans. The Act will reach the Senate floor today. Although the deal has not yet crossed the finish line, it looks like our legislators are finally prepared to give taxpayers the much-needed certainty they have long desired rather than once again kicking the extenders can down the road.
A highlight of the extenders included in the proposed legislation is as follows:
Individual Tax Provisions
Permanent Tax Relief
Enhanced child tax credit. The child tax credit (CTC) is a $1,000 tax credit. To the extent the CTC exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15 % of earned income in excess of a threshold dollar amount. The provision permanently sets the threshold at $3,000 (unindexed).
Enhanced American opportunity tax credit. The Hope Scholarship Credit is made permanent. The credit phases out for AGI starting at $48,000 for single filers and $96,000 if married filing jointly (indexed for inflation). The American Opportunity Tax Credit (AOTC) takes those permanent provisions of the Hope Scholarship Credit and increases the credit to $2,500 for four years of post-secondary education, and increases the phase-out for AGI starting at $80,000 (single filer) and $160,000 (married filing jointly filers) for 2009 to 2017. The provision makes the AOTC permanent.
Enhanced earned income tax credit. For 2009 through 2017, the earned income tax credit (EITC) amount has been temporarily increased for low- and moderate-income workers with three (or more) children, and the EITC marriage penalty has been reduced by increasing the income phase-out range by $5,000 (indexed for inflation) for those who are married and filing jointly. The provision makes these provisions permanent.
Elementary and secondary school teacher expenses. The provision permanently extends the above-the-line deduction (capped at $250) for the eligible expenses of elementary and secondary school teachers. Beginning in 2016, the provision also modifies the deduction to index the $250 cap to inflation and include professional development expenses.
State and local general sales tax deduction. The option to claim an itemized deduction for state and local general sales taxes in lieu of an itemized deduction for state and local income taxes is permanently extended. This provision remains beneficial for taxpayers living in states without an income tax.
Charitable Giving Incentives
Contributions of capital gain real property made for conservation purposes. The provision permanently extends the charitable deduction for contributions of real property for conservation purposes as well as the enhanced deduction for certain individual and corporate farmers and ranchers.
Tax-free distributions from individual retirement plans for charitable purposes. The provision makes permanent the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions made directly from individual retirement accounts (IRAs). The exclusion may not exceed $100,000 per taxpayer in any tax year.
Basis adjustments to stock of S Corporations making charitable contributions of property. The provision makes permanent the rule providing that a shareholder’s basis in the stock of an S corporation is reduced by the shareholder’s pro rata share of the adjusted basis of the property contributed by the S corporation for charitable purposes rather than the fair market value of the donated property.
Growth, Jobs, Investment, and Innovation Incentives
Research credit. The research and development (R&D) tax credit provision is made permanent. Eligible small businesses may use R&D credits to reduce the alternative minimum for tax years beginning after December 31, 2015. Additionally, qualified small businesses may use R&D credits to offset their payroll tax liability.
Small Business expensing limitations and treatment of certain real property as Section 179 property increased. The provision makes permanent the small business expensing limitation and phase-out amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively). The special rules that allow expensing for computer software and qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) are also made permanent. The provision further modifies the provision by eliminating the $250,000 cap applied to qualified real property.
The provision modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016. Additionally, air conditioning and heating units placed in service in tax years beginning after 2015 will be eligible for expensing pursuant to this provision.
Exclusion of 100 % of gain on certain small business stock. The 100 % exclusion of the gain on the sale of certain small business stock held for more than five years for non-corporate taxpayers is made permanent as well as the elimination of such gain as an AMT preference item.
S-corporation recognition period for built-in gains tax. The provision reducing the period from ten years to five years for which an S corporation must hold its assets following conversion from a C corporation in order to avoid the tax on built-in gains is extended permanently.
Provisions Extended through 2019
Work opportunity tax credit. The provision extends through 2019 the work opportunity tax credit. The provision also modifies the credit beginning in 2016 to apply to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) and increases the credit with respect to such long-term unemployed individuals to 40 % of the first $6,000 of wages.
Bonus depreciation. The provision extends bonus depreciation for new property acquired (not eligible for used property) and placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period). The bonus depreciation percentage is 50 % for property placed in service during 2015, 2016 and 2017 and decreases to 40 % in 2018, and 30 % in 2019. The provision continues to allow taxpayers to elect to accelerate the use of AMT credits in lieu of claiming bonus depreciation under special rules for property placed in service during 2015, and the provision modifies the AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.
Provisions Extended through December 31, 2016
Exclusion of COD income of qualified principal residence indebtedness. The exclusion from gross income of a discharge of qualified principal residence indebtedness is extended through 2016.
Mortgage insurance premiums treated as qualified residence interest. The treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction is extended through 2016.
Qualified tuition and related expenses. The Act extends above-the-line deduction for qualified tuition and related expenses for higher education through 2016.
Alternative fuel tax credit. The Act extends the credit available to users of alternative fuels, such as liquefied petroleum gas (propane), in motor vehicles or motorboats.
Railroad track maintenance credit. The Act extends the credit for railroad track maintenance expenditures through 2016.
Energy Production and Conservation Incentives
Energy Credits. Nonbusiness energy property, alternative fuel vehicle refueling property, two-wheeled plug-in electric vehicles, and credits for energy-efficient residential homes are extended through 2016.
Biodiesel and renewable diesel incentives. The provision extends through 2016 the existing $1.00-per- gallon tax credit for biodiesel and biodiesel mixtures, and the small agri-biodiesel producer credit of 10 cents per gallon. The provision also extends through 2016 the $1.00-per-gallon production tax credit for diesel fuel created from biomass. The provision extends through 2016 the fuel excise tax credit for biodiesel mixtures.
Real Estate Investment Trusts
The Act sets forth numerous provisions on Real Estate Investment Trusts (REITs), including certain restrictions on tax-free spinoffs, provisions that would reduce the percentage of REIT assets that may be invested in taxable REIT subsidiaries, a repeal of the preferential dividend rule for publicly offered REITs, and provisions that would modify the calculation of REIT earnings and profits to avoid duplicate taxation.
Elimination of residency requirement for qualified ABLE programs. The provision allows ABLE accounts (tax-preferred savings accounts for disabled individuals), which currently may be located only in the state of residence of the beneficiary, to be established in any state.
Prevention of transfer of certain losses from tax indifferent parties. The provision modifies the related-party loss rules, which generally disallow a deduction for a loss on the sale or exchange of property to certain related parties or controlled partnerships.